Weekly Market Update: Stocks Surge on Investor Optimism Amid Cooling Inflation, Small Businesses Struggle with Sales Decline

  • Bank of Canada raises rates by 25 basis points with a hawkish tone.
  • Stocks rally on positive investor sentiment, as cooling inflation boosts market confidence.
  • Small businesses face challenges as sales performance continues negative trend and inflation remains a concern.
  • Earnings season begins with optimism as initial results from airlines and major banks show signs of economic resilience.

Stocks experienced significant gains during the week, driven by positive investor sentiment from cooling inflation. The S&P 500 Index finished the week 6.50% below its all-time high, while the Nasdaq Composite also saw solid gains but remained 12.94% below its peak. Notable performers in the S&P 500 included casino operators, regional banks and asset managers. However, certain major pharmaceutical companies and the consumer staples sector lagged. The TSX followed suit with strong gains with oil up 2% for the week. European equities enjoyed the biggest weekly gain in about 3.5 months on signs of cooling inflation in the U.S., suggesting interest rates may soon peak.

On Monday, the Federal Reserve reported revolving credit in May, such as credit card debt, increased by 8.2% following a 13.8% rise over the previous month. On the other hand, non-revolving credit, which includes auto and student loans, experienced a 0.4% decline, marking the first decrease since April 2020 and after a growth rate of 2.1% in the prior month. It’s important to note that the Federal Reserve’s data does not encompass mortgage loans, which constitute the largest portion of household debt.1

On Tuesday, the NFIB’s Small Business Optimism Index increased by 1.6 points in June, reaching 91.0. However, it remains below the 49-year average of 98 for the 18th consecutive month. 24% of owners reported that inflation and labor quality were their top concerns. While there was a slight decrease in the difficulty of filling job openings, 42% of owners still reported challenges in finding qualified applicants. The percentage of owners increasing prices experienced a decline to 29%, suggesting a downward pattern, yet it remains at a level indicative of inflation. The net percentage of owners expecting higher actual sales improved but remained negative at -14%. Hiring activity decreased, and business investment remains weak.

Over the past three months, sales performance continued to show a negative trend, as a net negative 10% of owners reported an increase in nominal sales. Overall, the year’s second-half outlook remains negative for small business owners.2

The week’s key event was the release of the consumer price index (CPI) inflation data on Wednesday. Both headline and core inflation, excluding food and energy prices, increased by 0.2% in June, slightly below expectations. The annual increase in headline inflation slowed to 3% – the lowest since March 2021, while core inflation slowed to 4.8% – the lowest since October 2021.3

On Wednesday, the Bank of Canada increased its target for the overnight rate to 5%, with the Bank Rate at 5.25% and the deposit rate at 5%. They are also implementing a policy of quantitative tightening. Global inflation is easing due to lower energy prices and declining goods inflation. Economic growth has been stronger than expected, particularly in the U.S. China’s economic growth is softening, while the European area is experiencing stalled growth. The Bank’s July Monetary Policy Report projects global economic growth of approximately 2.8% this year, 2.4% in 2024 and 2.7% in 2025.4

The release of producer price index (PPI) inflation data on Thursday was even more encouraging. Headline producer prices rose by only 0.1% over the year ending in June, approaching deflation territory. Core producer prices increased by 2.4% over the period, which was close to the Federal Reserve’s inflation target of 2.0%, as well as the slowest pace since January 2021.5 On Thursday, the U.S. initial claims for unemployment benefits for the week ending July 8 decreased by 12,000 over the previous week to 237,000. Benefits for all programs for the week ending June 24 were 1,764,005 – an increase of 64,431 from a week earlier.6

On Friday, consumer sentiment, as measured by the University of Michigan, increased significantly in July, reaching a preliminary reading of 72.6. The latest reading marks the largest gain since December 2005 and the highest level since September 2021. The sentiment increase is attributed primarily to stable gasoline prices and low unemployment rates. However, expectations for inflation over the next year increased slightly to 3.4% in July, and expectations for inflation over the next five years rose to 3.1%. While sentiment has improved, concerns about the economic forecast and a potential downturn persist, with durable goods buying conditions still below recent levels.7

Investors are shifting their focus from inflation and central banks to corporate profits. The second-quarter earnings season has begun with U.S. banks, crucial for driving gains later in the year. The recent rally in the S&P 500 and TSX has been primarily due to increasing valuations, however earnings will now play a more significant role. Analysts predict that the second quarter will see the largest decline in earnings for this cycle, but it will also mark the end of the earnings downturn. The S&P 500 is expected to experience a 7.7% decline in earnings before turning positive in the third quarter, followed by further growth in 2024. The TSX is expected to see positive earnings growth one quarter later. Initial results from airlines and major U.S. banks have been encouraging, highlighting the economy’s resilience.









Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.

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